Office take-up in London hit a two-year low during the first quarter of this year, falling by a fifth compared with the final months of 2022 and by 22% from a year ago.
The 2.4m sq ft taken up between January and the end of March marked the poorest quarter since Q2 2021, said the team at Gerald Eve, and was 15% below the five-year quarterly average.
The firm said economic worries including high inflation and interest rates had seen tenants pause their hunts for new space.
A notable number of companies are now looking to sublet their existing space. Tenant-controlled availability reached a record high of 6.5m sq ft, around a third of the rise in overall availability, which at 8.6% is at its highest since the third quarter of 2021.
In the media and tech sectors, more than 250,000 sq ft has been released by companies, including Warner Bros, Twitter and Epic Games.
Financial technology firms such as Payment Sense and Cinch have put a combined 100,000 sq ft up for sublet, despite having signed prelets on the respective spaces in Paddington, W2, and King’s Cross, N1, as recently as June 2021.
Space review
The team at Gerald Eve now says banking and finance sublets will be a trend to watch this year. “Influenced by the ongoing issues in the banking sector, many banks are conducting space requirement reviews,” they said. “The UBS and Credit Suisse merger will likely lead to redundant office space as the firms consolidate, as well as HSBC’s review of office requirements.”
It also found South Bank and Canary Wharf are the submarkets showing the most noticeable rise in availability, due to an influx of new stock to the market from delayed completions.
The supply and demand imbalance looks likely to continue as an expected development pipeline of more than 8.7m sq ft for 2023 marks a record high.
Close to 42% of the year’s remaining development pipeline has been prelet, which has left around 4m sq ft of space sitting on the market due to wavering occupier demand.
Patrick Ryan, partner at Gerald Eve, said: “Occupier sentiment weakened this quarter and many are taking a cautious view of recent economic performance. This has led to a more tempered outlook and some occupiers are now running the rule over previously agreed forward commitments.
“But on balance there’s still strong demand for grade-A premium office space, especially properties with the best ESG credentials in the core of the West End, and supply is tight at the top end of the market. This has led to a significant number of transactions in the core West End at rents north of £100 per sq ft.”
‘Stability will return’
The investment market saw nine deals valued at a combined £1.7bn in the first quarter, leading the Gerald Eve team to suggest there is “increasing evidence of price stability returning”, which is vital if the market is to avoid stranded assets, according to partner Lloyd Davies.
That total is more than double that of the previous quarter but significantly below Q1 2022 figures, which stood at around £5.2bn.
Davies added: “Would-be vendors now have more confidence, and the sales pipeline is increasing. This will likely support a cautious recovery in transaction volumes later this year, following the very subdued activity during the last two quarters.”
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